INTRODUCTION

Beyond well-known areas such as Batamindo Industrial Park, Kabil Port and the shipyards around Batu Ampar, investors have a new destination in Batam. It is Nongsa Digital Park, located on the island's northeast corner; and now receiving firm-owners, managers and talent scouts from Singapore.

Inaugurated in March 2018, the park contains several smallish buildings grouped around a lake where about 300 people work for some 50 firms. These IT professionals are engaged in tasks such as coding, application development, data analytics as well as web design for Singapore-based firms in various sectors including logistics, education, travel, fintech, and insurance.

Rather than using separate offices, these people gather in large shared spaces consisting of long tables with individual work stations. When necessary, they use separate rooms for in-depth discussions and, in other cases, teams working on specific projects occupy purpose-built and fitted rooms. The atmosphere is young and dynamic, with stencilled patterns on the walls, table football in the corner, and most people dressed in black.

Despite the informal vibe, these programmers and web designers work intently and are closely integrated into projects being done in their respective client firms in Singapore. Beyond being wired into headquarters, these professionals often travel to the city-state for training and, in other cases, supervisors come to Batam to induct or supervise new hires. Output, motivation and career development are monitored closely on-site.

Despite its small base, the number of firms and workers in the park have increased steadily since its launch. The first three office blocks are full and three new buildings have been completed. There are plans for a much larger development, with leisure facilities and residential areas nearby. There are also promising investments in the pipeline by other investors, including a large Indonesian conglomerate as well as an industry major.

While still small in size, the Digital Economy (DE) sector has many structural similarities with the export-for-manufacture model that underpinned Batam's rapid economic development in the 1990s and early 2000s. However, rather than leveraging Indonesia's abundant ranks of lower-cost unskilled labour, this new sector is entirely premised on utilizing skilled workers.

INTRODUCTION

To Singapore's immediate south, the Province of the Riau Islands has a population of 2.2 million, and a land area of 8,200 square kilometres scattered across some 2,000 islands in 240,000 square kilometres of water. The better-known island groups include: Batam, the province's economic motor; Bintan, its cultural heartland and the site of the provincial capital, Tanjungpinang; and Karimun, a fishing and shipping hub near the Straits of Malacca. These island groups are more outwardly oriented and multiethnic, but the province also includes another three other island groups, namely Natuna, Anambas and Lingga, which are more isolated, rural, and homogeneous.

Within Indonesia, the Province of the Riau Islands (PRI) is relatively small in demographic terms, and very remote from the centre of power. Logistics connections between PRI and major population centres in Java and Sumatra are underdeveloped and overpriced, effectively barring significant commercial and cultural exchange between the “centre” of the country and this far-off province. For much of the recent past, government services and communication were routed through Pekanbaru, the provincial capital of Riau Province, to which the Riau Islands used to belong.

Yet, the province is strategically located next to major shipping lanes and telecommunications infrastructure, making it one of the most connected areas in Indonesia. Furthermore, it is close to Singapore and, through the city-state, able to access global capital and expertise. The Riau Islands has also long sought to capture spillover from Singapore, with policymakers looking north to identify trends and commercial opportunities. Thus, the province is simultaneously affected by its marginality and centrality.

Despite its small size, the Riau Islands is an important site for manufacturing in Indonesia. In late 1989, spurred by considerable flows of foreign direct investment into Singapore and Johor, the Indonesian government liberalized the investment regulations for Batam, allowed more private sector participation, invested more resources in physical infrastructure and began to work with Singapore to develop its human resource base and market the island.

Enabled by these changes, and catalysed by a favourable international environment, manufacturing-related investment flowed into Batam, dramatically boosting incomes. Singapore and Singapore-based firms were important sources of investment, as well Japan, Hong Kong, Korea, and Taiwan.

INTRODUCTION

Batam has an unbeatable business proposition. Situated a mere 20 kilometres from Singapore, linked by logistics networks, and possessing vastly cheaper land and labour, the Indonesian island is ideally placed to absorb investment from its wealthier neighbour. In theory, it should be teeming with investors and populated by factories and workers.

Indeed, this is just what happened during the 1990s and early 2000s. The liberalization of investment regulations, coupled with Batam's well-developed infrastructure and proximity to Singapore, made the island an attractive site for manufacturing operations seeking to escape the city-state's rising costs. During the 1990s, Batam's industrial base grew in size and sophistication, rapidly becoming one of the country's centres of electrical and electronics production. In the mid-2000s, the shipbuilding industry also began to develop on the island. Coupled with the older, more established tourism sector, Batam became a crucial source of foreign exchange for Indonesia. Through these three “motors”, hundreds of thousands of formal sector jobs were created, and the island became one of the country's richest—with its economy often growing at more than 10 per cent per annum.

Over the last few years, the success of Batam's export-focused industrialization model has come under question. In 2017, the island's growth rate flatlined at 2 per cent per annum, very substantially below the national average. Indeed, exports have been decreasing since 2013, and unemployment has spiked over the last two years. The once-burgeoning ranks of semiconductor, hard-disk drive, and component manufacturers have atrophied since 2010, with few new arrivals and many more anchor firms closing their facilities. In 2013, the shipbuilding sector, once heralded as Batam's sunrise industry, also began to contract. At present, the majority of the island's shipyards sit idle, or have turned to lower-value repair jobs to cover costs. Unemployment is now above the national average.

This chapter attempts to understand the key trends within Batam's manufacturing sector, and whether the island's manufacturing for export model is still viable. To this end, the chapter is structured in the following fashion. First, it will provide background to the development of the manufacturing sector on the island.

INTRODUCTION

This publication is the third in a trilogy that focuses on the Singapore-Johor-Riau Islands or SIJORI Cross-Border Region (CBR). The first of the series, The SIJORI Cross-Border Region: Transnational Politics, Economics, and Culture, takes Singapore as the anchor-point for the composite entity. In contrast, this volume on the Riau Islands and its predecessor on Johor focus on the other two territories in the Cross-Border Region. They explore how these are influenced by their belonging to a larger political entity—Indonesia and Malaysia, respectively—yet are also shaped by their connections to their neighbours.

This volume takes 1990 as a point of departure. Seeking to capitalize on flows of foreign direct investment (FDI) in the manufacturing sector, policymakers in Indonesia reduced the regulatory burden on business and liberalized ownership restrictions. Propelled by the influx of capital from leading economies in Northeast Asia and elsewhere, the Riau Islands’ economy grew in size and complexity. In a very short period of time, Batam, and to a lesser extent Bintan, were drawn into a range of global production networks in the electrical and electronics sectors.

Driven by this investment, the Riau Islands’ economy grew at break-neck speed and very rapidly became a major site for manufacturing within Indonesia. Attracted by formal sector jobs, people from across the country came to the islands, increasing its population and ethnic diversity. Increased per capita income, connections to world markets, and a unique sense of identity led to a campaign to secede from the larger Riau province, and establish a new province, with Tanjungpinang as the capital.

Thirty years on, it is timely to revisit this developmental trajectory, explore the lessons learned, and then look forward. With this as a backdrop, the guiding questions for this volume are:

• • What can be said about the sustainability of the Riau Island's manufacturefor-export economic model, as well as measures implemented to catalyse the development of new sectors?

• • What have been the political, social and environmental effects on the Riau Islands of the rapid economic development seen since 1990?

• • How is the province influenced by developments within Indonesia as a whole, as well as dynamics within the SIJORI Cross-Border Region?